Magazine

European Union: Sending The Wrong Signal To Business

October 10, 2004

The European Union is taking another step in regulating its labor market. Plans to increase monitoring of worktime and cap weekly working hours were approved by the European Commission. The proposal will now be sent to the European Council and Parliament. If passed, the measures intended to protect workers' health and safety could also be a competitive drag for the EU.

Some members will maintain exemptions for specific industries, such as health care and tourism. And the initial impact of the proposed changes to the Working Time Directive could be limited, given that most workers in Germany and France, the euro zone's largest economies, already have 35-hour workweeks.

The bigger issue is the message the proposed rules send to businesses, especially after some companies recently negotiated longer workweeks with unions. Less labor market flexibility and more regulation could make the EU less attractive to foreign investment, says Neil Bentley, head of skills and employment at the Confederation of British Industry. The risk is amplified as cheaper, less regulated sources of labor in China and India become more accessible for outsourcing.

Britain and the 10 new EU members are likely to resist. Britain currently has the most liberal opt-out policies. Any worker can sign a waiver to work more than 48 hours per week. The new policies could have a particularly big impact on Britain's financial sector, where people put in long weeks and monitoring is sporadic.

New EU members may also be disproportionately affected. In places like Poland and the Baltic states, there is less capital investment and labor is cheaper. Longer workweeks help these countries compete.

In a separate report, the EU recently warned that the union is falling short of a goal to increase the labor participation rate from 63% to 70% by 2010. Brussels noted employment growth was 0.2% in 2003 compared to 0.9% in the U.S. and said the EU must "increase its adaptability" in order to reach its target. The latest move appears to be a step in the wrong direction.